Unemployment at 44 Year Low

In what appears to be a complete contradiction to Brexit fears, the UK’s unemployment levels have hit a 44 year low. What’s more, employers have been taking on new candidates at the fastest rate in three years, with 35,000 people no longer reported as unemployed as of January. This takes the total amount of unemployed people in the UK to 1.34 million – 112,000 lower than last year.These recent findings from the ONS, combined with continued wage growth that is outpacing inflation levels, seems to go against all the doom and gloom Brexit predictions.

Things are not quite as straight-forward as they seem however. While low levels of unemployment, combined with rising wages, are certainly a positive, there are a few caveats to consider. These become clearer once the causes of falling unemployment are considered.

Causes of Falling Unemployment

Interestingly, Brexit could be one of the things that has contributed to unemployment reaching an all time low. Companies have been hiring at higher rates than normal due to the fact that taking on new employees is generally a safer option than investing when the economic climate is uncertain.

Another potential reason for spralling unemployment is the fact that the UK has the most unregulated labour market in Europe. This means that it’s a lot easier to hire, and, perhaps more notably, fire, employees. In France, where the unemployment rate is almost double that of the UK, the labour market is more tightly regulated. Employers in France, therefore, tend to be a little more reluctant to hire unless they’re sure they have the right candidate. Firing poor performing staff can be costly and long winded, and this is true for most countries across Europe.

Government policy since 2010 is also a probable contributor – the prospect of being reliant on a benefit system that now has a much harsher stance on unemployment is likely to have had the desired effect of ensuring more people stay in, or look for work.

Reasons to be Cautious

While low unemployment is always welcome, cautiousness has been touted by some economic experts. Most agree that wage growth is the most prominent potential issue. While wages have risen, and risen higher than inflation (although arguably not enough), they are not anywhere near where they are expected to be, given the record levels of employment.

Very low unemployment is, according to traditional economic models, supposed to lead to a similarly paced rise in wages. Instead, pay growth is actually at the lowest it’s been for a very long time, and still nowhere near pre financial crisis growth.

Real wages are still lower than a decade ago as well, and productivity levels continuing to suffer, having never fully recovered from the financial crisis in 2008. There are a number of possible reasons for this.

When it comes to real wages, one likely factor is that unions have less sway over worker wages. In the past, more GDP went to workers as a result of stronger unions. This changed after the 1980’s of course, and workers have generally received a lower share of GDP since as a result.

In terms of productivity, the UK has seen less investment in high tech manufacturing equipment, like robotics, than many other countries in Europe. Additionally, there has been quite a large shift to low productivity jobs, such as those in the hospitality and health and beauty sectors. This is certain to have affected productivity levels to some extent.

Long Term Impacts and Possibilities

One side effect of high employment, that is already being felt by a number of UK companies, is a growing lack of skilled workers. The fact that so many people are employed has created a situation where almost all skilled labour is accounted for. This, in turn, has affected wages – employers are pushing up salaries for existing workers, as well as offering higher earnings for new employees, in order to both retain and attract new talent in such a competitive environment.

Another potential problem is that, unless wage growth starts to drastically outstrip inflation, consumer spending will stagnate, causing even more problems for an already under pressure retail sector. Furthermore, as mentioned earlier, the high rates of hiring embarked on by UK firms is a safer alternative than investment, because the hiring of new staff can be undone fairly easily and cost effectively. This could potentially mean that companies will be quick to let extra staff go in the face of financial difficulties.

Overall then, although the recent low unemployment levels are extremely positive, there are subtle indicators that suggest the employment sector may have to get even tighter until wages and productivity start to rise at the expected, and corresponding, levels.